Here's a payroll question: How do you determine who is an employee?

 
The IRS defines who is an employee or an independent contractor, and it all depends on the relationship between the employer and the individual. It’s important to classify them properly, but it can be tricky. Here’s an example:
 
Joe Smith has committed to more construction jobs than he can handle, so he decides he needs help. Joe asks Frank to perform labor on a job site, providing all the saws and hammers Frank needs and ordering all materials to the site. He doesn’t have Frank sign any contracts, but shows Frank exactly how he wants the structure to be built.

While Frank is at work, Joe stops by and checks on him periodically. At one point, Joe makes Frank redo a wall he’s constructed. When the job is complete, Joe writes Frank a check for the agreed-on amount and says good-bye. At the end of the year, Joe sends Frank a 1099-MISC showing what he was paid.
 
Is Frank an independent contractor, or in fact, an employee?
 
According to the IRS, “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action.” 
 
Why is this important? If an individual is an employee, employers are required to take out payroll taxes from their paychecks, deposit the payroll taxes according to schedule, and issue W-2s. If you misclassify an employee as an independent contractor, you may wind up owing employment taxes for that worker.
 
By the IRS definition, Frank is an employee of Joe Smith. Joe determined the work that would be done and how it would be done and provided tools and materials. Instead of treating Frank as an independent contractor, Joe should have set up Frank as an employee in his payroll system, deducted payroll taxes and any other applicable taxes, and given him a W-2.
 
For more information on employees and independent contractors, visit the IRS website.